MERGERS AND ACQUISITIONS

By: RAJAN KAPOOR-111558 ROHIT SINGH-111560 SACHIN GANGWAR-111561 SACHIN KR. SINGH-111562

INTRODUCTION
Mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies . The distinction between a "merger" and an "acquisition" has become increasingly blurred in various respects (particularly in terms of the ultimate economic outcome), although it has not completely disappeared in all situations.

ACQUISITIONS(TAKEOVER)
An acquisition is the purchase of one business or company by another company or other business entity. Consolidation occurs when two companies combine together to form a new enterprise . . Acquisitions are divided into "private" and "public" acquisitions, depending on whether the acquiree or merging company (also termed a target) is or is not listed on public stock markets.

COMPLICATIONS IN ACQUISITION

Improper documentation and changing implicit knowledge makes it difficult to share information during acquisition. For acquired firm symbolic and cultural independence which is the base of technology and capabilities are more important than administrative independence. Detailed knowledge exchange and integrations are difficult when the acquired firm is large and high performing. Management of executives from acquired firm is critical in terms of promotions and pay incentives to utilize their talent and value their expertise.

DISTINCTION BETWEEN MERGERS AND ACQUISITIONS

In the pure sense of the term, a merger happens when two firms agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals". The firms are often of about the same size. Both companies' stocks are surrendered and new company stock is issued in its place. For example, in the 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when they merged, and a new company, GlaxoSmithKline, was created.

DISTINCTION BETWEEN MERGERS AND ACQUISITIONS (CONTD).

In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it is technically an acquisition. Being bought out often carries negative connotations; therefore, by describing the deal euphemistically as a merger, deal makers and top managers try to make the takeover more palatable. An example of this would be the takeover of Chrysler by Daimler-Benz in 1999 which was widely referred to as a merger at the time.

BUSINESS VALUATION
The four most common ways to valuate a business are: asset valuation. historical earnings valuation future maintainable earnings valuation relative valuation (comparable company & comparable transactions.

FINANCING M&A
Mergers are generally differentiated from acquisitions partly by the way in which they are financed and partly by the relative size of the companies. Various methods of financing an M&A deal exist:

1. 2.

Cash. Stock.

METHODS OF FINANCING M&A

Cash: Payment by cash. Such transactions are usually termed acquisitions rather than mergers. Because the shareholders of the target company are removed from the picture and the target comes under the (indirect) control of the bidder's shareholders.

METHODS OF FINANCING M&A

Stock: Payment in the form of the acquiring company's stock, issued to the shareholders of the acquired company at a given ratio proportional to the valuation of the latter.

WHICH METHOD TO CHOOSE??.

If the buyer pays cash: This method consumes financial slack (excess cash or unused debt capacity) and may decrease debt rating. There are no major transaction costs.

WHICH METHOD TO CHOOSE??.

If the buyer pays with stock, the financing possibilities are: It increases financial slack (if they dont have to be repurchased on the market), may improve debt rating and reduce cost of debt. Transaction costs include brokerage fees if shares are repurchased in the market otherwise there are no major costs

MOTIVES BEHIND M&A

The dominant rationale used to explain M&A activity is that acquiring firms, seek improved financial performance. The following motives are considered to improve financial performance.

MOTIVES & REASONS M&A

Increased revenue or market share: This assumes that the buyer will be absorbing a major competitor and thus increase its market power (by capturing increased market share) to set prices. Cross-selling: For example, a bank buying a stock broker could then sell its banking products to the stock broker's customers, while the broker can sign up the bank's customers for brokerage accounts.

MOTIVES & REASONS M&A

Taxation: A profitable company can buy a loss maker to use the target's loss as their advantage by reducing their tax liability. In the United States and many other countries, rules are in place to limit the ability of profitable companies to "shop" for loss making companies, limiting the tax motive of an acquiring company.

MOTIVES AND REASON

"Acqui-hire": An "acq-hire" (or acquisition-byhire) may occur especially when the target is a small private company or is in the startup phase. In this case, the acquiring company simply hires the staff of the target private company. Resource transfer: resources are unevenly distributed across firms (Barney, 1991) and the interaction of target and acquiring firm resources can create value through either overcoming information asymmetry or by combining scarce resources.

EFFECTS ON MANAGEMENT

A study suggests that mergers and acquisitions destroy leadership continuity in target companies top management teams for at least a decade following a deal. The target companies lose 21 percent of their executives each year for at least 10 years following an acquisition more than double the turnover experienced in non-merged firms. If the businesses of the acquired and acquiring companies overlap, then such turnover is to be expected; in other words, there can only be one CEO, CFO, et cetera at a time.

MAJOR MERGERS!
FROM 19902010 RAN K 1 YEAR Purchaser Purchased Transaction value (in mil. USD). 183,000

1999

Vodafone Airtouch PLC

Mannesmann

2
3 4 5 6

1999
1998 1999 1999 1998

Pfizer
Exxon Citicorp SBC Communications Vodafone Group

Warner-Lambert
Mobil Travelers Group Ameritech Corporation AirTouch Communications

90,000
77,200 73,000 63,000 60,000

7
8

1999
1999

Bell Atlantic[
BP

GTE
Amoco

53,360
53,300

Rank 1 2 3

Year 2000 2000 2004

Purchaser

Purchased

value (in mil. USD) 164,747 75,961 74,559

Fusion: America Online Inc. Time warner (AOL) . Glaxo Wellcome Plc Royal Dutch Petroleum Co SmithKline Beecham Plc Shell Transport & Trading Co BellSouth Cor poration

4 5

2006 2001

AT&T Inc Comcast Corporation

72,671

AT&T Broadb 72,041 and & Internet Svcs Wyeth Pharmacia Corporation Bank One Corp 68,000 59,515 58,761

6 7 8

2009 2002 2004

Pfizer Inc Pfizer Inc JP Morgan Chase & Co